Euro falls to 22-mth low vs dollar on diverging rate outlooks

The euro hit a 22-month low against the dollar on Thursday on the prospect of diverging monetary policy between the Federal Reserve and the European Central Bank as rate differentials swing decisively in the greenback's favor.

The common currency fell to $1.2730 on trading platform EBS, its lowest since November 2012, and was down 0.3 percent on the day. The dollar index hit a new four-year high.

The latest drop came as yield differentials between US 10-year Treasuries and their German counterparts traded near 15-year highs, driving more investors to buy the dollar.

A recent batch of economic data has also highlighted the diverging economic outlook for the euro zone and the United States. While German business sentiment fell again in September to its lowest level in nearly 1-1/2 years, sales of new U.S. single-family homes surged in August to their highest level in more than six years.

ECB President Mario Draghi kept alive expectations of more policy steps in the euro zone, including the possible use of sovereign bond purchases, also known as quantitative easing (QE), to revive the region's stalled economy.

Draghi told the Lithuanian business daily Verslo Zinios the ECB was ready to use additional unconventional instruments or change the size of current asset purchase programmes if it became necessary to address risks of very low inflation.

"ECB President Mario Draghi continues to beat the QE drums ... so hardly surprising that euro/dollar is trading at even lower levels this morning," said Esther Reichelt, currency strategist at Commerzbank.

The euro's losses took the dollar index to a fresh four-year high of 85.342, leaving it on course to record its 11th consecutive weekly gain. Traders said the dollar was likely to be bid as the Fed looks to end its QE programme next month, with the mounting yield gap set to underpin it in the near term.

One of the biggest movers in the currency market was the New Zealand dollar. It fell after Reserve Bank of New Zealand Governor Graeme Wheeler took more direct aim at the currency, stepping up his rhetoric against kiwi strength.

"The Bank's analysis indicates that the real exchange rate is well above its sustainable level and also above levels justified by short-term business cycle factors," Wheeler said in a statement.

The New Zealand dollar, the 10th most traded currency globally, fell below 80 U.S. cents for the first time since mid-September 2013. It dropped as far as $0.7948, down 1.6 percent on the day.

"The comments are both another indirect verbal intervention to talk down the kiwi and also a clear signal that the RBNZ is moving closer to direct intervention to weaken the kiwi. In these circumstances the kiwi is likely to remain on the defensive," Bank of Tokyo Mitsubishi said in a note.

The Australian dollar also dipped to an eight-month low of $0.8792, down 1 percent on the day. The Aussie has fallen more than 5 percent this month against the greenback, a magnitude not seen in more than a year.

The greenback also pressed higher against the yen to reach 109.34, not far from last week's six-year peak of 109.46. It was last up about 0.1 percent at 109.18 yen.